Kaman Corp (KAMN) Q3 2021 Earnings Call Transcript

Kaman Corp (KAMN)
Q3 2021 Earnings Call
Nov 3, 2021, 8:30 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, ladies and gentlemen, and welcome to the Kaman Corporation Third quarter 2021 Conference Call. [Operator Instructions]

I would now like to hand the conference over to your host today, Rebecca Stath, Vice President, Controller. Please go ahead.

Rebecca Stath -- Vice President, Controller

Good morning. I'd like to welcome everyone to Kaman's Third Quarter 2021 Earnings Call. Conducting the call today are Ian Walsh, Chairman, President and Chief Executive Officer; and Jamie Coogan, Senior Vice President and Chief Financial Officer. Before we begin, I'd like to note that some of the information discussed during today's call will consist of forward-looking statements, setting forth our current expectations with respect to the future of our business, the economy and other future events. These include projections of revenue, earnings and other financial items, statements on plans and objectives of the company or its management, statements of future economic performance, and assumptions underlying these statements regarding the company and its business.

The company's actual results could differ materially from those indicated in any forward-looking statements due to many factors. The most important of which are described in the company's latest filings with the Securities and Exchange Commission, including the company's third quarter 2021 results included on Form 10-Q and the current report on Form 8-K filed yesterday evening together with our earnings release. We also expect to discuss certain financial measures and information that are non-GAAP measures as defined in applicable SEC rules and regulations. Reconciliations to the company's GAAP measures are included in the earnings release filed with yesterday's 8-K.

Finally, we posted an earnings call supplement to our website that is designed to provide additional context on our financial performance, key events for the period and additional information on the makeup of our sales. You can find this presentation at www.kaman.com/investors/presentations. With that, I'll turn the call over to Ian Walsh.

Ian K. Walsh -- President and Chief Executive Officer

Good morning everyone and thank you for joining our third quarter 2021 earnings call. I'd like to begin today's call with a brief summary of the quarter followed by updates on operations and several of our strategic R&D growth initiatives. I'll then turn the call over to Jamie for more detailed discussion of our financial results.

Our business continues to perform extremely well and we are on target to deliver to our revised full year expectations. Third quarter revenue was $179.8 million compared to $214 million in the prior year period. As we continue to recover from the impact of the pandemic, we are seeing stronger volume in key areas like medical and industrial platforms. The third quarter also marked the first time we have demonstrated year-over-year growth in our bearings business since the start of the pandemic, and total sales for our springs, seals and contacts are now fully recovered and outpacing pre-pandemic levels.

Gains in these areas were offset by anticipated declines in safe and arm devices as we had record JPF deliveries in the prior year and commercial aerospace products continue to operate below pre-pandemic levels. Notably, all of our higher margin highly engineered products are performing well. This is translating into strong profit performance in the period. Adjusted EBITDA of $27.8 million or 15.5% as a percentage of sales in the quarter. This result was up 70 basis points sequentially, driven by strong gross margin performance in the quarter, but trailed the prior year of $35.5 million or 16.6% to a lower Fuze deliveries year-over-year.

Turning to our products and beginning with bearings, demand continue to improve during the quarter, and we delivered growth across the majority of the portfolio. Our sales volume to Boeing and Airbus increased sequentially for self-lubricating bearings, and we saw an increase in engine aftermarket components. As commercial airline traffic continues to rebound, we anticipate this trend to continue.

Moving to spring, seals and contacts, volume and performance continue to improve in the third quarter. We remain well ahead of pre-pandemic levels are now beginning to see the full benefit from the Bal Seal acquisition with strong profit contribution. We are confident in the continued growth we see for the remainder of the year in these products.

Looking at our K-MAX program, recall that the last quarter, we shifted the second K-MAX delivery to the second half of the year due to a customer financing and timing of their fleet. I'm excited to announce we recently signed contracts with two customers for K-MAX aircraft with anticipated delivery in the fourth quarter.

Finally, in our structures program, we continue to be below pre-pandemic levels as a result of the commercial aerospace recovery and some challenges related to workforce levels in some of our facilities. Despite these headwinds, profitability was up sequentially as we benefit from the deployment of our operations excellence model.

Turning to our business development efforts. We are very enthusiastic with the progress we are making on several key initiatives. The core of Kaman is innovation and Kaman has a rich 75 [Phonetic] history of delivering highly engineered custom solutions to our customers. Today, we believe there are significant opportunities as our industries embrace new technologies that will transform A&D in space travel at a pace not seen since the early days of human flight. I am proud to say that we are investing in and well positioned to participate in this wave of innovation in autonomous flight, eVTOL and the space economy.

Given our broad product portfolio, we are serving many of the leading companies in these markets and we expect to continue to be a trusted partner. Beginning with the autonomous flight, I am pleased to report that during the quarter we unveiled cargo UAV aerial system. A purpose-built medium-lift autonomous aircraft, an event held on our Bloomfield campus in September. This cargo holding systems compact design makes it easy to transport to overseas operating sites, but is also highly capable with 800 pounds of payload capacity.

Our initial addressable market is the US military, which represent a strong use case and straightforward path to reduction. Longer term, the platform capabilities lend themselves to a wide range of commercial applications and was designed to be upgradable to EV capability as next-generation battery technologies improve. A link to a video of the event can be found on our website.

We continue to make progress on TITAN UAV aerial system, an unmanned heavy lift logistics helicopter in support of our customers' requirements. Last week, we successfully demonstrated the autonomy, an obstacle avoidance technology has been integrated into our K-MAX aircraft for the United States Marine Corps. We received positive feedback from this demonstration, validating our efforts as we continue to upgrade the software and prove out this autonomous heavy lift capability.

As I previously highlighted, products manufactured using our proprietary titanium diffusion hardening process provides us with several opportunities to expand our customer base and provide meaningful solutions to a broad range of end markets. This process opens up new engineered applications by providing a lightweight and high-strength benefits of titanium alloys while improving service, hardness, durability and wear characteristics.

Our proprietary process hardens the titanium surface in order to benefit from the properties of titanium with sustainable hardness in more rugged applications. Customer interest to date has been very strong and we already have products using TDH process in space, eVTOL and A&D applications, but we believe there is a much wider commercial use case for this process beyond these markets. We have asked our team to identify the total addressable market, and we look forward to sharing those details as they become available.

Next, I'd like to touch on some specific high growth end markets where we’re gaining traction. Beginning with eVTOL, command is very well positioned to become a trusted partner to a range of emerging eVTOL manufacturers. We are platform agnostic. As our technologies such as titanium diffusion hardening process, seals, springs and contacts, and self-lubricating bearings aid in reduction -- in reducing weight for these next generation vehicles. For example, our rotary seal applications are currently used in the vertical takeoff unit of a leading eVTOL manufacturers propeller system and we recently received another award from the same eVTOL provider to deliver specialty bearings technologies made from our TDH material.

We expect to deliver these bearings in the fourth quarter with validation testing expected for the first quarter of 2022. Additionally, we have been approached or in active discussions with several emerging eVTOL companies across the globe. Turning to end market opportunities and space applications, our focus on highly engineered solutions have positioned us well with emerging space exploration companies. As space in large companies continue to commercialize and build volume, we anticipate we will gain a growing share of content across manufacturers and launched service providers. We currently have applications on every major commercial launch vehicle in the United States.

Now, I will turn the call over to Jamie for a closer look at the numbers. Jamie?

James G. Coogan -- Senior Vice President and Chief Financial Officer

Thank you, Ian, and good morning everyone. Today, I will highlight our third quarter results before turning to our outlook for the remainder of 2021. During the third quarter, net sales from continuing operations were $179.8 million, down 15.9% from the $214 million in the prior year period. Organic sales, which exclude sales associated with our former U.K. operation, were down 14.8%. Lower year-over-year sales was primarily the result of lower JPF deliveries in the period compared to record deliveries in the prior year period. While the commercial aerospace products continue to see pressure, we saw growth in our medical and industrial business where volumes have returned to pre-pandemic levels or above.

Turning to our product lines, defense sales were down 27.6% in the third quarter of 2021 compared with the prior year period and 5.5% lower sequentially. The year-over-year and sequential decline was primarily the result of lower JPF revenue. For the quarter, we delivered a total of 4,000 JPF units compared to almost 14,300 units in the prior year period and 8200 units in the second quarter of 2021. We expect to deliver 28,000 to 30,000 fuses for the full year, slightly below our prior expectations. However, given the over time revenue recognition method related to our USG contract, the reduction in deliveries does not result in a change to our sales expectations for this product.

Our current JPF pipeline remains strong and we are looking to secure additional DCS orders in the near term. Additionally, we continue to make progress in R&D efforts related to our safe and arm devices. In October, we had two successful flight demonstrations of our fire burst enhanced fusing device. A command patented height of burst sensor that brings in all new capability to our existing family of safe and arm devices.

Sales in our commercial and general aviation businesses were 15.4% lower compared to the year ago period, but increased 8.8% sequentially. The year-over-year decline was due to lower commercial bearings volume, particularly with OEM customers as OEM customers continue to be affected by the impact of COVID-19. We also shipped one additional K-MAX aircraft in the prior year, which contributed to the decline. Sequentially, improvement was almost entirely driven by higher volumes of commercial bearings to our OEM customers. We expect this momentum to continue as commercial aerospace end markets continue to recover. We have seen order intake at a slightly slower rate than we had previously anticipated and a higher volume of orders with delivery dates into 2022.

Sales in our medical end market increased significantly by 25.6% when compared to the prior year. Higher volume of bearing products and growth in medical implantable and analytical devices drove this improvement. Sequentially, sales for these products were modestly lower. However, we continue to be encouraged by the performance of these products for the first nine months of the year. Order rates for our medical products remain strong, which provides us confidence in our expectations for the fourth quarter and continued growth into 2022.

Finally, sales in our industrial end markets was 29.4% from the year ago period and were relatively flat sequentially. The demand for springs, seals and contacts, as well as for bearings and measuring products improved against the backdrop of ongoing economic recovery. We continue to benefit from the economic recovery and expect to see strong order rates for these products through the balance of the fiscal year and into 2022.

Gross margin for the quarter improved on a year-over-year and sequential basis. Gross margin rose to 35.1% from 31.3% in the prior year period and 34% in the previous quarter as we continue to focus on driving improved performance through the deployment of our operations excellence model. In addition, the year-over-year improvement benefited from the sale of our U.K. composites business in the prior year, improved K-MAX spares and support performance, and stronger profitability for our seals, springs and contacts.

SG&A for the period was 21.9% as compared to 17.2% in the year ago period and 21.2% in the prior quarter. These increases were largely due to higher employee-related costs as we saw an increase in group health expense and higher incentive compensation costs resulting from our improved year-over-year performance. As part of our continued effort to manage cost, we've undertaken a facilities rationalization plan at our structures manufacturing sites. We expect this to result in cost savings beginning in the first half of 2022 with total realization of approximately $4 million by 2024.

On a consolidated basis, our operating income was $16 million compared to an operating loss of $38.9 million in the third quarter of the prior year. Higher profitability stem from the absence of the goodwill impairment charge and cost related to the acquired retention plans incurred in the prior year period as well as lower TSA cost associated with our former distribution business. We completed these TSA activities during the third quarter of 2021.

Adjusted EBITDA from continuing operations in the third quarter was $27.8 million or 15.5% of sales compared to $35.5 million or 16.6% of sales in the prior year period. The year-over-year decline in EBITDA margin was largely due to the previously mentioned employee-related costs, partially offset by the absence of U.K. losses and the improvement we saw in gross margin. We are proud of the fact that adjusted EBITDA margin improved sequentially from 14.8% of sales in the previous quarter as a result of our ability to maintain gross margin on lower sales volume, slightly offset by the higher employee-related costs.

We continue to aggressively target our efforts at maximizing gross margin and controlling G&A while making smart R&D investments to drive future growth. Diluted earnings per share from continuing operations were $0.53 on a GAAP basis, compared to diluted loss per share from continuing operations of $1.39 in the third quarter of 2020, which included a goodwill impairment charge. On an adjusted basis, diluted earnings per share from continuing operations were $0.60 compared to $0.70 in the prior year period. The primary adjustment in the current quarter included restructuring and severance costs.

During the quarter, we generated adjusted free cash flow of $25.6 million, improving our adjusted year-to-date free cash flow generation to $27.9 million. This compared to free cash flow generation of $22.4 million in the prior year quarter and free cash flow usage of $66.6 million for the nine months ended October 1, 2020. This improvement is primarily driven by strong cash collections and improved working capital management as a function of our operations excellence focus.

Moving to the outlook. We are revising our full year guidance for 2021. We now expect full year revenue in the range of $710 million to $720 million due to the shift of the K-MAX sale into 2022 and lower than expected sales from our structures programs. However, we are raising the low end of our prior expectations for adjusted EBITDA to $92.5 million to $97.5 million and adjusted earnings per diluted share to $1.84 to $1.95. This reflects the continued strong performance expected in our medical and industrial end markets, the anticipated incremental recovery of commercial business and general aviation products through the balance of the year, and overall improvements in operational forecasting, planning and execution. The increase in margin is largely the result of mix, as strength in our higher margin engineered solution products more than offset the expected volume declines in our lower margin products.

Finally, before turning the call back over to Ian. We are in the process of finalizing our evaluation of our management and reporting structure. We expect to conclude this analysis in the fourth quarter, which will likely result in our full year 2021 results being reported in more than one segment. With that, I will now turn the call back over to Ian for closing remarks.

Ian K. Walsh -- President and Chief Executive Officer

Thanks, Jamie. With one quarter left to go in 2021, we are pleased with our profitability and remain encouraged by the improvements we're seeing in the end market conditions, especially as commercial aircraft backlogs are reduced and production rates increase. We continue to win more profitable programs, shed unprofitable work, we focus our growth strategies in global developing markets, and reposition our new autonomous technology around the needs of our military war fighters. We are well positioned to deliver on our -- on our revised full year earnings targets.

We will continue to work diligently to expand our capabilities to innovate and organically grow all our businesses, while relentlessly improving our operations in achieving excellence in all that we do. Our future is dependent on our talent and I'm thankful to our workforce of more than 3,000 dedicated employees whose commitment has been instrumental in our success. With that I'd like to open the line for questions, can we have the first question please.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from the line of Steve Barger with KeyBanc Capital Markets. Your line is now open.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Thanks. Good morning, guys.

Ian K. Walsh -- President and Chief Executive Officer

Hey. Good morning, Steve.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Ian, you talked a lot about innovation and future growth programs. I know it's early to talk about next year, but if I look at revenue from 2018 through consensus 2022, it's basically flat for five years. Do you have enough confidence in the cycle and new programs to say '22 revenue will be up from this year, and you can break out of this range.

Ian K. Walsh -- President and Chief Executive Officer

Yeah, no. I do, Steve. And I think where we're obviously in the planning phase right now. A couple of factors. One is looking at our end markets and what's happening with the commercial recovery and the timing of that is a key part of it. We've already seen, I think very strong growth in industrial and medical this year, we expect that to continue through next year. And obviously with JPF volumes, we have line of sight through JPF volumes through option 15 and 16 through '22 and 2023. We've got a great pipeline there of DCS. So we continue to work.

So, I mean organically, I do expect to see year-over-year improvements. We're just going to -- the variable here is going to be relative to certain programs that we're working on and we'll see how that goes. I think the bigger, more exciting part to me is quite frankly is the story that and again this is what we shared with a lot of folks already, we've got a very nice story to tell that's taking shape, and we're excited to kind of tell that story early next year.

Steve Barger -- KeyBanc Capital Markets -- Analyst

So I'll just follow up with a similar question on operating margin. Given the mix that you see and the programs that you said you're working on, and just whatever you can control internally, can you start to drive operating margin expansion in a sustainable way and get out of this kind of mid to high single-digit range.

Ian K. Walsh -- President and Chief Executive Officer

Yeah, absolutely. I think that's really what the thrust of the new operations excellence model is all about. It is a function of the type of programs we've had. And just to be quite frank, we've been in some programs that weren't as profitable as we'd be needed to be and we've -- we've exited those programs and we're bidding more profitable work, winning more profitable work because it's more sophisticated in nature. So I think that's very much in our control. I mean, Jamie talked about just overall networking capital that we're pressing hard on.

A lot more training that we've implemented at all of our business -- business unit specific training, around lean and cost out and waste elimination and variation reduction those things is taking root. This is the first full year, just to be clear, that we've had that training in place. We're expecting to realize even more benefit from it next year and beyond. And I think just the overall program execution planning has gotten much, much better. Again, those were all different pillars in our operations excellence model.

Steve Barger -- KeyBanc Capital Markets -- Analyst

And I'll ask one more and get back in line. Is your R&D spend more focused on specific end markets like medical or aerospace or more product line focused around bearings for the helicopter and UAV systems. I'm just trying to understand how you're prioritizing the organization for opportunities.

Ian K. Walsh -- President and Chief Executive Officer

Yeah, fair question. I would say that your second part of that is the right answer, which is we really are focusing on the bearings businesses or precision products businesses. Certainly autonomous technology that we think is a great growth market. What's nice though is when you focus on those parts of our business, the end markets are very diverse. So our bearings business is cut across, right, not just aerospace but industrial medical. So we're really kind of seeing the benefits play out in the end side, but the investment is focused on the parts of our business that really drives that return.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Thanks.

Operator

Our next question comes from the line of Seth Seifman with J.P. Morgan. Your line is now open.

Seth Seifman -- J.P. Morgan -- Analyst

Hey, thanks very much and good morning. There were some -- some very good gross margin performance in the quarter. And so I guess if you could dig into that a little bit more in terms of what -- what enabled that in terms of -- in terms of mix, price, cost, sort of what the drivers were and how to think about that going -- going forward.

James G. Coogan -- Senior Vice President and Chief Financial Officer

Yeah. A lot of that, Seth, a lot of that comes down to, there were some -- we had some favorable mix for sure in the quarter that helped offset some of the declines when you look over that year-over-year performance. We did have strong JPF DCS in the prior year where we delivered a gross margin percentage there that was a nice one. But this year we did better than that despite the lower volumes on DCS and that speaks again to the value that we see in our Bal Seal acquisition and the products that they bring to us with the springs, seals and contacts, and seeing that come back in a really nice way with good strong growth year-over-year out of that business, as well as some favorable product mix we had at our specialty bearings business with some of our product mix there.

As we -- we've taken, we've talked about this in the past, we've taken a number of steps to really right size the cost structure at the organization, and we expect to have some meaningful drop-through opportunities as volumes continue to increase. So we think this is a good sign for gross margin performance going forward. Obviously, quarter to quarter depending on when we might sell the K-MAX, right, or if the portfolio shifts a little bit more toward structures, sales and deliveries. You could see a little bit of ebb and flow there. But when we look at that, the engineered highly engineered products base, we are seeing those nice gross margins come through.

Ian K. Walsh -- President and Chief Executive Officer

And I'd add Seth, just on pricing, obviously we're ending this year. We've made certain price adjustments were necessary. I think looking forward, the teams are very focused on the value pricing propositions, not just as a function of the type of program, just in general. So we expect to keep pushing on that one hard. And Jamie mentioned the cost out. We've really seen some nice efforts. Certainly, our structures businesses where was the most opportunities and we really focused on those businesses to get them healthier and more profitable. And the bearings business have naturally been very, very profitable. And now we're sitting in this -- with K-MAX in cargo and some other really exciting programs starting to take root. We’ve got opportunities there as well.

Seth Seifman -- J.P. Morgan -- Analyst

Great. I guess we don’t want to let a conference call go by this quarter without asking about the supply chain issues, and I think there was the -- small mention of it in the 10-Q. So maybe if you guys can sort of tell us where things stand there. What the potential risks are there and how you're mitigating them.

Ian K. Walsh -- President and Chief Executive Officer

Yeah, a couple of things on that. We watch this very closely, naturally, everybody is. We just by nature of our businesses and the materials we buy, we are seeing lead times push out that -- and that is being accounted with just, again one of our pillars of operational excellence is looking at our supply chain or the way we plan. So they're really incorporating that into our planning. So we're handling that I think very nicely. From a pricing perspective, we're not seeing anything dramatic or material. We are seeing things like adhesives, we're seeing some stuff now with composites coming through. But again, that's I think being able to price that through and pass it through deal with it from cost out. They're handling it very nicely from a margin perspective, but we're not seeing anything dramatically yet, we're always watching it very carefully. But it's really the lead times that we're watching mostly.

James G. Coogan -- Senior Vice President and Chief Financial Officer

Yeah, and just to add on the wage side, right. We think about the labor -- the labor portion of that. We are seeing a little bit of wage inflation, probably in our entry level positions as we are competing for those folks to come into the organization to help with assembly and tasks as they begin to develop. We are working to try to retain the workforce. We haven't had any real material results costs associated with the retention just yet, but that is top of mind for us as we move through the remainder of this year for sure. But as Ian has said, we've been able to manage that pretty nicely so far through the year and still deliver on our results. But we're absolutely mindful of it as we enter the fourth quarter of this year and then looking into 2022.

Seth Seifman -- J.P. Morgan -- Analyst

Right, OK. Okay, great. And then just one more for now. I think Jamie said at the end of your remarks, looking at offering some segments.

Ian K. Walsh -- President and Chief Executive Officer

All right.

Seth Seifman -- J.P. Morgan -- Analyst

Going forward, and so, yeah, maybe what I guess what those would be and how to kind of what you guys are looking to sort of highlight by doing that.

Ian K. Walsh -- President and Chief Executive Officer

Yeah, I'll just start real quick -- I mean we've heard loud and clear and we had this on our agenda. And we are, as Jamie mentioned in his remarks, we're focused on it. We're planning on doing it. It will be more than one segment for sure. I think it's going to highlight some really important things that we want our community, our investor community to know about our business, which really is I think fundamental to where we're going.

James G. Coogan -- Senior Vice President and Chief Financial Officer

Yeah. And you get to that point would part of that process. Seth, as you know is really evaluating the management structure and we talked about that for some time. As Ian gets his feet underneath in here and he has just past his one year mark, September of this year. So we were really evaluating what that management structure needs to look like and making sure we've got that put in the right place. We are being mindful of cost though as we go through that. So I don't want that to come across as if we're going to create these bloated management structure. He's here to support that, but we are, that's an important pillar for us to be able to determine exactly what those look like. So we are in the stages of finalizing that's probably too soon for me to share specifically what those segments will look like. But as Ian noted, will be certainly more than one and we plan to let you guys know sooner rather than later, what that might look like once we finish our valuation.

Seth Seifman -- J.P. Morgan -- Analyst

Okay, great, thanks. Thanks very much guys.

Ian K. Walsh -- President and Chief Executive Officer

Yeah, thanks. Thanks, Seth.

Operator

Thank you. [Operator Instructions] Our next question comes from the line of Pete Skibitski with Alembic Global. Your line is now open.

Pete Skibitski -- Alembic Global -- Analyst

Good morning, Ian and Jamie. Hey, guys, on the shortfall would -- the fuses in the third quarter as a little unclear to me, was there an issue with the Delta strain coming through and so workers not showing up or is it just something else, supply chain, I just want to make sure I was clear on that.

Ian K. Walsh -- President and Chief Executive Officer

Yeah, I know it is funny, there was nothing to do with any disruption or anything like that at all. Quite frankly, just to remind you, we said this in the remarks. Last year overseas customer was basically going through a massive reorg and the paperwork, the payments were all being delayed, and that all shook itself out. And quite frankly, in a very positive way. So we -- we want to make sure we got our deliveries in last year in the third quarter, as we mentioned, so we kind of overdrove there. Relative to this quarter, we're in a much steadier consistent cadence. And as you can imagine, when you're level loading your plants and delivering in a stable way, it makes for a lot more efficiencies that we look for. So and the customers have been paying very reliably and consistently. So that's why there is a difference there.

Pete Skibitski -- Alembic Global -- Analyst

Okay. Okay. And then just on the fibers, obviously interesting been a new product, but how should we envision this, is this plan to be maybe just sort of an upgrade to prior fuses or -- and maybe who the first customer be. How are you guys thinking about that.

Ian K. Walsh -- President and Chief Executive Officer

Yeah, well, so first of all kudos to the team. This has been a development program that it's been in work for a while and a huge milestone was achieved with live drops of the weapon that went flawlessly. This is an enhancement to the basic marketing to launch and what it does is, it creates a height averse capability that didn't exist before on these laser-guided bombs. All different sizes of bombs that can be deployed and configurable from the cockpit, etc. So its enhanced capability on a historically non-sophisticated weapon, so it really provides a lot more capability, working with an overseas customer on that. We've got initial order that we're working on right now. And the upside here I think is very exciting. Too early to tell, but the milestone has been met. The product has been designed and now it's been validated. So we're excited to move forward.

Pete Skibitski -- Alembic Global -- Analyst

Is there any further testing left to do or?

Ian K. Walsh -- President and Chief Executive Officer

There'll be some refinement here and there, but really now it's about moving into production with our initial order. So down the road, obviously, the enhancements and things like that, but that we've demonstrated the capability as it is today, very successfully.

Pete Skibitski -- Alembic Global -- Analyst

Okay. Okay, that's great, I appreciate it. I guess last one for me, similar question on the cargo UAV. I know there's a lot of, I don't know early. A lot of expressions of interest in unmanned lift in DoD. Are we to the point yet, Ian, where there's kind of a formal program of record in a competition that's ready to go or is that maybe a year out. How should we think about the timing there with that opportunity?

Ian K. Walsh -- President and Chief Executive Officer

Yeah, no, I can tell you exactly what kind of where we are. Again very, very excited about the launch of cargo this year. The engineering team here at KV did a marvelous job in a short period of time of taking a concept that was driven as we've expressed before directly from our customers, specifically the Marine Corps. Obviously, other services now, we were at AUSA with the Army. We've got conversations with SOCOM coming up, Special Operations Command. And we're also expecting, as I mentioned, lot of commercial applications. We've got some initial calls and things like that happening. Bottom line is that from a military perspective, which is exactly where we want to be.

We are in the requirements formulation stage with the customer as we speak. So that actually is supposed to be done by next year, probably mid-year. So imagine the requirements finally getting kind of finalized for a medium and possibly a heavy lift as well, that's where K-MAX and TITAN comes in. We just had another very successful demonstration, huge milestone that the teams were working on for over a year. Just recently at Fort Pickett in Virginia, that went exceptionally well.

So now we're expecting that next year, those requirements get detailed out and then at some point probably late next year or in the next -- the following year, there will be an RFI or an RFP floated.

Pete Skibitski -- Alembic Global -- Analyst

Okay, great. I appreciate that and I'm going to back track. I'm going to ask one last one, I apologize to, this one to Jamie. I apologize I always seem to get confused about the K-MAX orders and deliveries. But there -- were there no deliveries this quarter and you're expecting one or two in the fourth quarter, can you just clarify?

James G. Coogan -- Senior Vice President and Chief Financial Officer

Yeah. Yes, so let me just point of reference in the Q3 of 2020, we had one delivery of K-MAX, right. Q3 of 2021, we had zero. We just announced sort of with our press release last evening that we had received contracts for two K-MAXs, which are expected to be delivered in the fourth quarter of this year. And in the fourth quarter of last year, we had one K-MAX aircraft. Now, our expectation, our prior expectation was for four K-MAXs through the course of this year, but we did -- we did bring down our top line revenue expectations due in part to the potential for that fourth aircraft to shift into 2022.

Pete Skibitski -- Alembic Global -- Analyst

Okay. Okay, great. Thanks for clarification. Thanks guys.

Ian K. Walsh -- President and Chief Executive Officer

Thanks, Pete.

Operator

Thank you. We do have a follow-up question from the line of Steve Barger with KeyBanc Capital Markets. Your line is open.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Thank you. Just a couple of modeling questions. Do you expect commercial business in general will be down again in 4Q against that comp from last year or I guess sequentially if that's easier just how are you thinking about that business for 4Q?

James G. Coogan -- Senior Vice President and Chief Financial Officer

Yeah, Steve. It should be up, I mean there is a couple of things there, one with the K-MAX deliveries those flow through that commercial business in general aviation. So when you look at that line item on a quarter-by-quarter that can impact a little bit of that year-over-year comparison that you might be looking at, but we do expect those to flow through there. I mean, we do expect to see continued strength in our commercial business and general aviation products specifically as we look at like our bearings technologies and their ability to deliver to the order rates. Again, we've seen order rates increase in that -- for those products and we expect to see an increase there. So we're working through that now with the team.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Got it. And will medical and industrial stay flattened to 4Q in that same range as 2Q and 3Q or will seasonality cause those to be lower sequentially?

James G. Coogan -- Senior Vice President and Chief Financial Officer

It's going to be a little bit higher, right. So we should see an increase there. I won't give specific amount, right. It's hard for me to predict right now, but we do expect that to be up just based on what we're seeing with orders.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Okay. And on slide 4 under the industrials, there is a bullet that says Industry 4.0 and artificial intelligence, can you just expand on what that means?

Ian K. Walsh -- President and Chief Executive Officer

Yeah, no, I'm happy to -- for our bearings businesses, one of the things that's the next level of performance for highly machined, very automated processes and connecting with ERP systems, connecting with customer demand is to effectively push into what we call Industry 4.0. What is industry 4.0? We just did an assessment at our K-MAX facility and we're starting effectively with them, which is a very strong business that to start with. They have very strong processes. It's connecting all of those value streams together in an automated way. So all the data systems coming in. If you can imagine you know traditionally very manual processes, even though you're using ERP systems, it's a relatively manual process.

Now, we're getting a much deeper understanding and ability to kind of streamline the flow through those product lines and that get cuts all again from our suppliers to our customers. As an example, I was -- I just visited Spirit AeroSystems and was there for a day and -- and talking with their leadership and they've done a very nice job, they’re about three years into Industry 4.0. And to give you an example, it's optimizing every single machine. So in the past, if you think about disruptions and bottlenecks and things like that that are again dealt with on a daily or manual basis, we now have a system that can predict from a planning perspective how to optimize every single machine that you have, and those kinds of things. So that's where you get that next level of efficiency. That's what industry 4.0 is.

James G. Coogan -- Senior Vice President and Chief Financial Officer

Yeah. And then for the opportunity for us really relies in as people roll that out more meaningfully into their -- into their operations. We are positioned with the vendors who are going to provide some of that automation technology, whether it be robotic arms and others for industrial manufacturing, food and beverage, manufacturing in those types of applications. So we've got nice positions with our technology to be able to support that.

Steve Barger -- KeyBanc Capital Markets -- Analyst

What do you think the timing gap is between seeing a big sophisticated customer like Spirit do that versus smaller people in the supply chain?

Ian K. Walsh -- President and Chief Executive Officer

Let me assure you said that the timing, am I --

Steve Barger -- KeyBanc Capital Markets -- Analyst

Yeah, I guess that's like how pervasive is this out, is it something that you're pushing or or that you're, it's a pull from other customers or presumably you'll do this upstream as well.

Ian K. Walsh -- President and Chief Executive Officer

Yeah, I'm going to be clear to being an ops guy here and having spent a lot of time in this environment. This is not a one size fits all, this is not pushing anything down. This is really adopting kind of the next level of planning and automation and digitization to our processes to continually optimize, optimize, optimize and level load and really understand how we're driving efficiencies through operations. It's us, it's a standard that's now precipitating itself across industry and there's those again have been early adopters and they're moving along and seeing really nice improvements in their costs and their operational metrics.

And so for us, we're not blanketing it. We're starting with one of our strongest businesses. We've got very strong processes to really test it out. We just finished what they call a smart industry readiness assessment just to see where the gaps are. So we're stepping into it very mindfully. Because at the end of the day, I'll tell you this, I told the team this, we're not doing this for the sake of doing it. We're doing it because we want to optimize margins. We want to generate cash, we want to show faster returns and really drive quality metrics across our product lines. And so that's what it's all about.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Got it. And that's actually a nice segue into my last question. You spent a lot of time talking about K-MAX and now cargo UAV and just thinking about those in the context of your goals to maximize EBITDA margin, free cash flow conversion and ROIC. Can you talk about what size those programs need to be, to be additive to those metrics and -- and just the timeline for how you see them really being stronger contributors.

Ian K. Walsh -- President and Chief Executive Officer

Yeah, I'll start. I think again, having spent a lot of time in these worlds in the defense contracting world and new product development side of things, I'll just be upfront. I think K-MAX like I said we just finished a massive milestone. The requirements are still being worked with the Marine Corps. It is specifically a Marine Corps program. Although, like we've talked about, we actually have a relatively strong commercial interest in the unmanned variance for natural reasons, when you talk about firefighting.

So when I look at the kind of the commercial market. I think it will reflect, kind of what we're doing today, which is hopefully it will be more units per se, because it's a different, different capability. On the military side, certainly with the Marines, I'd say easily within the next probably two years, we'll have a real understanding, if they're going to move forward with this capability. And by the way, it's not just heavy lift with K-MAX tightened in the autonomous capability there’s a lot going on with networking and other things.

Cargo to me is potentially a much, much larger program. Quite frankly, because it's, again it's purely autonomous, it’s purpose-built. The mission sets for these are limitless in my -- in my perception is certainly from what our services are asking. We have got a lot of meetings coming up here with all the services who have expressed interest. We've got commercial operators as well. And I'd say, as I've said before, our goal here is with and by the way we’re trying to fast track this. We're not trying to go through normal acquisition process. There are ways to fast track these types of programs. It can be a very meaningful program for us. Certainly within five years is my -- is kind of my timeline on that. That's the goal we're setting for ourselves to really have something that's in production on both the K-MAX and cargo potentially.

And I will also say that, that's the beginning stage. We talk about having a family of autonomous capabilities. That's kind of where we're headed. And that's beyond that probably the five-year window. But very strong reception right now with cargo UAV and certainly with the latest K-MAX demos.

Steve Barger -- KeyBanc Capital Markets -- Analyst

And I think you had mentioned this in your prepared comments, but if you do an Analyst Day or you'll have you'll have some numbers in terms of addressable market to be able to update us sometime next year?

Ian K. Walsh -- President and Chief Executive Officer

Absolutely, I mean that's our game plan is to early next year. As we talked about, we've got acquisitions in work. We've got commercial recovery, really strong operational excellence. And honestly, just to put a fine point on this. We had a really great quarter overall. If you look at FireBurst and K-MAX and cargo launch. We've had some of our facilities, one in particular, just got a massive manufacturing award. Margins are strong. Cash is strong. I think we're really positioning ourselves well to share and with segmentation coming, they really share where we're headed as a company, which is very exciting and to tell our story and talk about the addressable markets and line it out for you guys early next year.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Since you brought it up, any more color on the massive manufacturing award?

Ian K. Walsh -- President and Chief Executive Officer

Yeah, it was Jacksonville. It was industry, excuse me, it was a -- it was award called – it’s called the First Coast Manufacturer of the year. And that was -- it's a regional award. There was about 200 companies that are part of it. It's really a function of their operational excellence improvement and lean journey and they just got that award.

Steve Barger -- KeyBanc Capital Markets -- Analyst

Got it. Thank you.

Ian K. Walsh -- President and Chief Executive Officer

Yeah.

Operator

Thank you. We do have a follow-up question from the line of Seth Seifman with J.P. Morgan. Your line is open.

Seth Seifman -- J.P. Morgan -- Analyst

Hey, thanks, good morning. So just a follow-up had one on the defense business and sort of the places in defense where -- where you are a supplier. I noticed various puts and takes going on, there's some declines on the Blackhawk, but some growth on new helicopters like CH-53K. So I guess when you look out for that excluding the safe and arm, but that sort of defense business. How do you think about the progression there as we -- as we move into '22.

Ian K. Walsh -- President and Chief Executive Officer

I'll start. I'll start with -- Jacksonville has the Blackhawk cockpits, I mean I think a lot of the OEMs early this year, as a function of COVID were going through the exercise and trying to figure out what they wanted to continue sourcing and outsourcing and things like that. And that really was a function of their own capacity and what's happening with COVID and trying to fill their factories. What we did and what we are doing is we're demonstrating to them that we are best-in-class at what we do and as an example, the relationship with Sikorsky, the BlackHawk cockpits, which we've been doing for many years. The Jacksonville facility was struggling on that program. We brought in a lot of great professional help. Part of our lean journey, part of our operational excellence model. To the extent now whether we've actually come back to us and said that we are key to their success going forward.

So we’re expecting more work there, seeing with -- I met with my colleagues at Bell Helicopter and Textron Aviation and really outlining our capabilities with those folks. But on the defense side, I think where the helicopter industry is going for sure we're very well positioned with kinetics [Phonetic] and things like that. And our bearings businesses. We've got some really exciting work that's going on in our structures businesses, CH-47 fuel probe is a great, great example of the program, that’s extremely profitable that we're very excited about. So I think like I said earlier, we're repositioning ourselves in the right ways relative to certain defense programs.

Now, we're also very well positioned on the future vertical lift in Florida in those upcoming big programs which is also going to be upside for us.

James G. Coogan -- Senior Vice President and Chief Financial Officer

Yeah, just to add in, Columbia-class submarines, the Joint Strike Fighter. We've got content on that across the business in our engineered product space. So there are some really nice again growth programs inside of our defense portfolio. And again, that really just speaks to the broad proliferation of our products across that where we have structures, we've got bearings, we've got sealing technologies across a broad range of those defense products, right, in various stages of their life cycles. And then because of the extension of use, Seth, that we're seeing with certain platforms, they're running into problems today and they're coming to us to help solve those problems on some we'll call legacy aircraft.

Ian K. Walsh -- President and Chief Executive Officer

Another example is our facilities Jacksonville for example just got their Part-145 certificate. So there's a lot of aftermarket work that's very profitable, that those folks are very good at doing. So that's another growth opportunity for us.

Seth Seifman -- J.P. Morgan -- Analyst

Great, thanks very much.

Ian K. Walsh -- President and Chief Executive Officer

Yeah, thanks, Seth.

Operator

Thank you. There are no further questions. I will now turn the call back to Rebecca Stath for closing remarks.

Rebecca Stath -- Vice President, Controller

Thank you for joining us on today's conference call. We look forward to speaking with you again when we report our fourth quarter results.

Operator

[Operator Closing Remarks]

Duration: 49 minutes

Call participants:

Rebecca Stath -- Vice President, Controller

Ian K. Walsh -- President and Chief Executive Officer

James G. Coogan -- Senior Vice President and Chief Financial Officer

Steve Barger -- KeyBanc Capital Markets -- Analyst

Seth Seifman -- J.P. Morgan -- Analyst

Pete Skibitski -- Alembic Global -- Analyst

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